Answer:
Scenario 1 has WACC of 7.93%
Scenario 2 has WACC of 10.33%
Step-by-step explanation:
WACC=Ke*E/V+Kp*P/V+Kd(after tax)*D/V
Ke is the cost of equity =13%
Kp is the cost of preferred stock=10%
Kd(after tax) is the cost of debt of 8% adjusted for tax as below:
Kd(after tax )=Kd(before tax)*(1-t)
t is the tax rate of 30% or 0.3
Kd(after tax)=8%*(1-0.3)=5.60%
E is equity value,which is $1.8 million under scenario 1 and $3.8 under scenario 2
P is the value of preferred stock which is $1.2 million and $2.2 million respectively
D is the value of debt which is $5 million and $2 million
V=total value of capital structure=$8 million in both cases.
Scenario 1 WACC
WACC=13%*1.8/8+10%*1.2/8+5.6%*5/8=7.93%
Scenario 2 WACC
WACC=13%*3.8/8+10%*2.2/8+5.6%*2/8=10.33%
